When it comes to finance, loyalty rarely pays, and mortgage loyalty is no exception. You may think that staying with your current lender when your fixed rate mortgage term ends could be an affordable decision, but it couldn't be further from the truth – fail to remortgage to a better deal, and you could pay an extra £400 every year.
That's according to research from Citizens Advice, who found that loyal customers who roll onto their lender's standard variable rate (SVR) when their deal comes to an end can pay a hefty penalty, with far higher repayments than if they'd chosen to remortgage.
The figures show that a customer who reverted to their lender's SVR after their two-year mortgage term ends can face an average loyalty penalty of £439 a year – based on the mortgage costs of the six largest mortgage providers – while one in 10 pay over £1,000 per year extra, simply by staying on the standard rate.
First-time buyers could fare even worse: thanks to the fact that they typically have more debt and more time left on their mortgage, they could pay an extra £1,359 a year once their deal expires. Many mortgage holders aren't even told about their options when a fixed term ends, with two-thirds not aware of the fact that they could save money by switching.
The charity is therefore calling on the Financial Conduct Authority, the UK's financial watchdog, to require all lenders to inform customers how much they could lose by reverting to a standard variable rate, and to consider changing the name of the default rate to help customers better understand what they're getting into.
"More than a million loyal mortgage customers are being stung with higher interest charges when their fixed deals end," said Citizens Advice chief executive Gillian Guy. "Buying a home is a major life decision and borrowers taking out their first mortgage often spend a great deal of time working out the best option for them.
"Our research shows that many who choose fixed rate mortgage deals face steep price hikes once they expire – but two-thirds of borrowers say their lender has never told them they could save money by switching. Lenders must be more upfront and provide their customers with clear information about what could happen to the cost of their loan once the fixed term period ends."
Citizens Advice calculates that as many as 1.2 million people – or 83% of those currently on a lender's SVR – could be far better off if they switched to a new mortgage deal. The only caveat to this is if you've only got a small amount left on your mortgage, in which case the potential fees associated with taking out a new fixed rate could be counter-productive, but for the majority, remortgaging is the way to go.
So what's stopping you? Mortgage rates are still at record lows, too, so you've got no reason not to see what else is out there. Our remortgage Best Buys could be a great place to start, or check out our mortgage calculator for a more personalised overview.
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